CHAPTER X DISCUSSION
10.3 MALA wrs INVESTMENT INCENTIVES
Today, most countries around the world are striving to create a more favourable climate to attract foreign direct investment. Efforts to influence the locational decisions of transnational corporations have led many governments to offer incentives to attract investment from other countries. Towards this end, Malawi has taken steps to liberalise its foreign-direct-investment regime by reducing distortions regarding FDI, adhering to certain standards of treatment for transnational corporations, and ensuring the proper functioning of the market.
According to Whiteside's study in 1989, the incentives offered by Malawi were "rather confused" with even local businessmen unsure as to what was available. At the time of the study, Whiteside stated that the incentives had not been marketed, and their availability was not a major consideration for investors. The results of this study seem to be consistent with those proposed by Whiteside in 1989. The survey data generally confirmed the theoretical explanation given by Agarwal (1980) that incentives play only a limited role, relative to other variables, in company decisions to locate FDI in Malawi.
Both the fiscal and financial incentives offered to foreign investors play a limited role in investments in the country. The study revealed. that Malawi does not have a
comprehensive incentive regime for each sector within the economy - the general incentives apply and investors in' all sectors may apply to the government to be considered - this therefore refutes the hypothesis that the Malawi Investment Promotion Act (1991) offers a wide and attractive range of incentives to foreign investors. The current investment incentives do tend to favour new and Greenfield investments, thus putting existing operators at a disadva.ntage for re-investing. However, these incentives are unclear, as they are granted on a case-by-case basis, and this is not transparent or fair.
The incentives for any investment in Malawi are weak compared to those available in other regional countries, and thus result in the low amount of new investment and re- investment in Malawi. Most of the incentives laid out in the Act are currently unavailable, and are only granted at the discretion of individuals in the government. Even when incentives are granted to foreign firms, other arms of government, including the Malawi Revenue Authority (MRA) and the Ministry of Finance, often override them.
Furthermore, the recent suspension of duty waivers has caused confusion among potential and actual investors without generating significant incremental revenue. This in turn has deterred investors and delayed investment in Malawi.
The results indicate that the process of investment in Malawi has been improved through the MIPA "one stop shop window", but areas of concern still remain. The approval of incentives and then variations by other parts of government are reported to be problematic. Moreover, the value of the incentive is open to discretion by government and then not guaranteed once granted.
In addressing the second hypothesis, which regards the effect of investment incentives on the level of FDI to Malawi, an examination of the survey results reveals some correlation between the level of FDI inflows and the introduction of investment incentives. During 1993-2001, MIPA facilitated close to US$188 million of FDI. From a low of US$100 million in 1980, the stock of FDI reached US$284 million by 1997 and averaged about 10% of GDP. This rise in FDI to Malawi concurred with the enactment of the Investment Promotion Act in 1991, and the establishment of MIPA in 1993. These figures seem to
suggest that the passing of the Investment Act contributed significantly to the increase in FDI flows to the country.
The same could be said with regards to the third hypothesis concerning the impact of FDI flows on the economic growth rate of the Malawian economy. The overall performance of the economy during the period 1990-2002 has been mixed due to external and internal shocks. The real GDP growth rate improved from an average of 1.9% in 1980-1989, to 4.1 % in 1990-1999. Similarly, FDI inflows to Malawi rose during the period 1990-1999, and then fell drastically as GDP declined to from 4.1 % to 0.8% in 2000. These figures indicate some correlation between the level of FDI in Malawi and real GDP per capita.
However, although most empirical studies conclude that FDI contributes to economic growth in host countries, the survey results are consistent with an OEeD Report (2002) which states that it is more difficult to assess the magnitude of this impact, not least because large FDI inflows to developing countries often concur with unusually high growth rates triggered by unrelated factors.
Although it can be said that the enactment of the Investment Promotion Act in 1991 and the numerous investment incentives offered may have had somewhat of a positive effect on the economic growth rate and FDI levels in Malawi, the results of the survey need to be viewed in the context of other events which occurred concurrently within the domestic economy. The 1990s saw the first multi-party elections held in Malawi. The introduction of a democratic government enhanced investor perceptions of the country, and spurred inward FDI flows to the country. There were many disputes surrounding the second multi-party elections in 1999 and the outcome. This adversely affected Malawi's image to foreign investors, and the country saw a steady decline in foreign investment figures.
However, the political environment in Malawi has not been the only decisive factor in the country's inability to attract FDI. Provisional estimates from the National Statistics Office (NSO) suggest that the high real interest rates, which have made borrowing prohibitively expensive, have been the most significant factor in the slowdown of the economy, compounded by severe maize shortages. Another contributing factor was the withdrawal of significant IMF funding from the. country, which has had severe
repercussions for the economy as a whole. In the same vein, the downturn in FDI flows in 2000 was also attributed to macroeconomic instability, unstable exchange rates, and high inflation rates, which deterred potential investors from entering the country.
The above findings support the theoretical proposition that, given all the factors that can impinge on investors' decisions, it is difficult at best to isolate the effects of just one factor, such as incentives, on the level of FDI inflows to Malawi, and the country's growth rate. However, it can be said that the current investment incentives available to foreign investors are not sufficiently attractive to make international investors select Malawi as a place for doing business.